Despite the fact that understanding options is not difficult it is crucial that you gain a basic knowledge of the stock market in general before attempting any options trading strategies.

In fact, if you have not been buying or selling stocks for a few years most financial planners would recommend that you take the time to learn how the market works; including the potential pitfalls that many beginning investors fall for.

Once you have a basic understanding of the markets in general investing via options can be a profitable trading alternative. Savvy investors know that stock options provides a less cash intensive method of investing in the stock market that leverages the amount of money that they have committed to the market. Options have the unique ability to generate additional cash flow each and every month.

The process of understanding options begins with learning the basic terminology that is often used. As this site focuses primarily on selling covered calls we will identify the terms that you will need in order to execute this type of options transaction.

Call Option – A call option is basically a contract in which one investor sells the right to buy a certain number of shares of their stock at a certain price if the transaction is executed before a certain date in exchange for premium income.

Strike Price – The strike price is the agreed upon price in which the option contract can be executed and the underlying asset must be delivered. For example, a DELL June 20 call has a strike price of $20 per share. If the option is exercised the owner of the option can buy 100 shares of DELL stock for $20 a share.

Expiration Date – The expiration date is merely the date at which the option contract expires. The owner of the option (known as the holder) must decide whether to exercise the option or to simply allow it to expire worthless. In the US, option contracts expire on the Saturday following the third Friday of the month. If that Friday is a holiday then the option expires on Friday.

Paper Trading – Paper trading is something that all investors should do before committing real money. Paper trading allows you to test out a few strategies without having to worry about losing any money. It is a great way to become familiar with what could happen along the way so that when you are using real money you will know how to respond.

If you are looking for alternative investment strategies that will help supplement your monthly income options trading may be just what you are looking for. Understanding options is crucial to your overall success.